Majority of Plans Overpay. Cut Costs: Now is the Time to Benchmark

Over the course of our conversations during the last 12 months we have heard time and again the outrage regarding the fees and cumulative costs of 401k plan administration.  Yes, we know it is a cost center.  Yes, we understand that administering the 401k plan is often a thankless job.  Yet being a cost center and being a thankless job, does not have to cost your company an arm and a leg to avoid the administrative tasks involved with providing a top-notch 401k plan which is crucial for your valuable employees in their planning for eventual retirement.   

Upon closer scrutiny, fees have been following a downward trend for several years for corporate 401k advisory and administration. Technology created ease of administration and initiated increased efficiencies, all of which have contributed to better fund structures and lower prices for all types of administration. As technology continues to usher in more efficiency, every plan sponsor owes it to their Plan Participants to send their Corporate 401k plan out for an analysis (often called a “Benchmarking analysis[i]).

Thus, creating increased urgency and importance to benchmark one’s plan. Overpaying for your plan can expose your company to legal recourse from employees. Reexamining fees and comparing your company’s plan to the market rates and expected services, will reassure employees that the company’s leadership has their back. Changing environments mean changing expectations and due diligence is the best way to stay ahead of the trends.

               Administration fees are typically, and should be, the greatest cost of the plan. It represents the work portion. A good advisor will help the HR team ensure that the company’s employees are receiving a best-in-class education opportunity which will be the most critical factor determining the successful creation and implementation of their future outcomes. Employee 401k education is one of the most important requirements a business owner or HR head must consider when choosing an adviser. It is the largest portion of the total cost of the plan and therefore, should be the highest quality at the best price.

A good advisor will select the best allocation options – meaning the best fund choices at the lowest prices. Fund choices should and must be selected according to the absolute cheapest options that allow the investor to get an as good or equal return on a similar basket of assets. Therefore, giving the plan participant to invest in the assets they want to at the minimum negative compounding effect of overpriced fund options. Your advisor should be a fiduciary, not a brokerage or insurance company – where you can be sure they are not taking commissions for pushing more expensive actively managed funds.

Your advisor should be transparent, and part of that openness should include benchmarking the plan every other year. It is the only way to ensure that your company’s employees are getting the deal that is in their absolute best interest, always. There is no harm in doing this kind of comparative analysis when there should be nothing to hide. Overpaying for a plan is inexcusable, but you must have the right information in order to know whether you are or not. We advise asking your advisor to benchmark your plan today, which we always do for free.

[i] A benchmarking analysis is defined as the process through which a company measures its own 401k Plan performance against that of similar plans, or their competition’s plans.  The goal of which is to a) ensure the corporate 401k plan is offering employees the best plan available.  Benchmarking regularly ensures the plan is kept in line with competitive costs.   Benchmarking also tends to dissuade law suits based on the corporate sponsor neglecting their fiduciary duty.